The IT Services Disruption is here

In my post of December 8, 2008 I had predicted a disruption in the IT services landscape.
Back then though I had little clue on what could cause the disruption and what it would look like. I was predicting changes in the pricing models. However, the last 10 months and in fact the last 10 days have seen a lot of change in the IT services landscape.

Dell bought Perot, Xerox bought ACS this morning. This combined with Oracle’s acquisition of Sun and Cisco’s entry into servers, makes one trend very clear.

We are in many ways going back to the 1980s when Digital Equipment Corp (DEC) was the single source supplier from Hardware to OS to Applications for its clients. Vertically integrated solution providers (VISPs) are the new wave, and that’s what IBM, Oracle, HP and Dell want to be.

So how does that impact the IT service providers? With Dell’s-Perot and Xerox’s- ACS acquisition just like that we are down to just a handful of independent IT service providers. I can only think of Accenture, CSC, Capgemini, Deloitte and the India based providers. And these independent ones now have reason to worry.

The VISP trend is clear and will become stronger over the next few months as customers start accepting it. So the independents will have to think deep and hard if it really makes sense to remain independent. Their boards will be under tremendous investor pressure to sell to the next set of buyers, which according to me will be the likes of Cisco, EMC, Microsoft or SAP.

Once the next few deals are announced the remaining service providers will be forced to sell themselves cheap. So don’t be surprised if there are some fire sales out there after the next few deals.

The trends above lead me to one more question. Why is no one buying the large India based IT service providers like Cognizant, Infosys etc.

Is it because-
a) The cultural integration between US and Indian companies is more difficult
b) The Indian companies have higher market caps making them unattractive
c) India has lost its cost advantage and that one can get work done in North Dakota for the same cost as Bangalore.
d) Questions remain on the financial and corporate governance issues at India based service providers given the recent troubles at a major.

With President Obama vowing to bring jobs back to the US and also the proposed tax breaks for US corporations, it is possible that the cost advantage (or lack of) can in fact become a reality. All it will take is easing up of immigration to import talent from other countries.

Clearly the next few months will be interesting to watch as we start seeing more announcements. The disruption is here.. the services landscape is changing and will look a lot different in the next 18-24 months. Stay tuned...